With volatility once again systemically active throughout the equities market, option traders rejoice! It’s as if spring is here and we have been rejuvenated. These are the environments that option traders dream about.
With the $VIX advancing over 13 percent in just three trading sessions, option premiums have expanded exponentially. We are very active watchers of options activity. Over the last few months, daily volume in equity options has ranged from 12 to 17 million contracts per day. Yesterday, over 27 million contracts exchanged hands as investors rush to buy puts to protect the recent decline in the underlying stocks.
While we likely haven’t hit the bottom of this pullback, option traders can target sectors that have shown strength and sell the unnecessary volatility being priced in.
Our feeling is that Ag stocks continue and will continue to lead the way. They have shown great relative strength and the industry leaders even managed to close in the green yesterday. We are once again looking at Mosaic Co. (MOS) as a great setup to collect some Time Decay while maintaining a light Delta positive stance.
We can utilize this thesis by using a Call Calendar Spread to meet both of these objectives. Because a calendar spread sells the front month and buys a further-dated month, the position can be structured to be Delta and Theta positive.
We will also benefit from sideways trading in that the volatility priced into the front-month option will contract faster than that of the further-date option. This will allow us to enjoy volatility contraction for a short time as well.
Looking at the charts, Mosaic clearly held the support level yesterday and has since bounced off of it. We are using the 80 strikes to construct the position as this seems like a logical spot for the underlying stock to move back and settle towards.
Calendar spreads needs to be watched closely as they are very dynamic and making adjustments is often necessary. That said, we will look to quickly lock in profits on this position.
Trade Idea:
BUY +4 CALENDAR MOS 100 JUN 11/APR 11 80 CALL @2.33 LMT
Trade Details:
Type: Call Calendar Spread
Expiration Month: April/June
Breakeven Level(s): $72.71 & $88.90
Maximum Gains: $1,232
Profit Taking Level: $400
Maximum Loss(es): -$932
Stop Loss: -$225